Is Grab a good catch after its 37% fall?

TL;DR

• Grab’s share price fell 37% on the day of release of its 4Q21 results, bringing its share price decline from the time of merger with Altimeter Growth Corp to close to 70%.
• Disappointingly, losses in its Deliveries division (including Grab Food) have increased due to more incentives given to consumers
• Likewise, its Mobility division (ride-hailing) also saw earnings being eroded by higher incentives given to drivers.
• Looking ahead, its guidance for 2022 has been uninspiring as it continues to invest for growth.

What happened?

Grab Limited, which got listed in the US last year in the biggest SPAC transaction to be announced at that time, saw a plunge in its share price of 37% on the day of release of its 4Q21 results. This brings its share price of US$3.28, a far cry from the level when it announced the combination with Altimeter Growth Corp.

What is causing the sharp fall in its share price? We share some of the reasons why it might not be wise to grab Grab shares despite the sharp fall.

#1 Deliveries losses widen with more incentives (Yay for consumers!)

The key area of disappointment to investors was a widening of EBITDA losses for its Deliveries business to $84 million in 4Q21. This is much higher than the loss of $22 million in the previous quarter, and a loss of $2 million in the same quarter last year.

Management explained the wider losses as being driven by an increase in consumer incentives. Yes, these are the coupons that we have been using to get a discount on our Grab ride or delivery!

Grab might have increased on these promos in Indonesia following the entry of its rival Shopee into the food delivery business. It isn’t that Shopee is doing too well either based on its 4Q21 results, and we explain why Sea is in choppy waters here.

#2 Mobility earnings also came down

Grab started its operations as a ride-hailing business, and the performance of its mobility division is also closely watched. Here, its profit also came down, with EBITDA falling to $76 million in 4Q21 from $113 million in the same quarter last year.

Once again, management explained that this was due to more incentives given to its driver partners, as it had to increase its supply of drivers ahead of expected increase in volume with easing of lockdown measures across Southeast Asia.

All in, it would seem like Grab saw its profit being eroded by more incentives being given. Here, consumer incentives have risen to $365 million in 4Q21 from just $162 million in the same quarter last year.

Investors were hoping that these incentives would have come down as Grab becomes more focused on profitability following its public listing. But that does not seem to be the case based on its most recent results.

#3 Forward guidance is uninspiring

Looking ahead, it does not seem like management guidance for how the business will perform in the year ahead and in the long term has provided much reason for investors to hold on to the stock.

Here, the company expects Mobility Gross Merchandise Value (GMV) to be in the range of $750 million to $800 million in 1Q22, not too different from the $765 million achieved in 4Q21. Likewise, company expectations for Deliveries GMV of $2.4-2.5 billion in 1Q22 is flat from 4Q21 GMV of US$2.44bn.

Looking even further ahead, the company expects the long term EBITDA margin for its Deliveries segment to be 3%, which pales in comparison to its US peers which have higher long term targets of 5-6%.

What would Beansprout do?

In the near term, Grab has to demonstrate that it can bring down incentives in both its Mobility and Deliveries businesses before investors may be convinced about how it is able to achieve long term profitability. This might be particularly important given the headwinds faced by tech stocks amidst a rising interest rate environment, and increasing pressure for companies to show that they can be profitable.

Coupled with the lacklustre guidance given, investors may not be in a hurry to grab the shares even with the share price correction.

Deciding between Grab and Sea? Check out our article Grab vs Sea – Which is a better investment?